Small banks see raising capital as rehab tool

<i>Facing higher regulator, investor
expectations, locals get to work </i>

Those aiming to invest in a community bank need not look beyond Northeast Ohio to find willing takers.
Liberty Bank in Beachwood is at the tail end of a $5 million capital-raising effort, and Middlefield Banc Corp. is in the process of raising $25 million in capital. Central Federal Corp. of Fairlawn also has signaled that it's after more capital, though details of its plans are scant.
Attempts by community banks to raise more capital are occurring with greater frequency nationwide, industry insiders say.
“What you're seeing is the tip of the arrow,” said Jeff Quayle, senior vice president and general counsel for the Ohio Bankers League. “You're seeing the start of what I expect to be a three- to five-year trend.”
The current capital-raising activity is more than what occurs in a typical year, said Charlie Crowley, who helps banks raise capital as managing director of Paragon Capital Group LLC in Mayfield Heights. From 2000 to 2008, there was far less activity, Mr. Crowley said, because the industry for the most part was profitable and banks were accumulating capital through retained earnings.
“In many cases, they were worried about becoming overcapitalized, which sounds strange these days,” Mr. Crowley said.
Today, after a wrenching period of losses, regulators and investors have higher expectations for capital levels. As a result, over the last 18 months, several Northeast Ohio banks, including other community banks such as Park View Federal Savings and the region's largest players such as KeyCorp, have gone to market to raise money in what Mr. Crowley calls “part of the ongoing rehabilitation of the industry.”
Two of the aforementioned local banks — Liberty Bank and Central Federal, which is the parent of CFBank — are after capital, in part, because regulators require it.
Some community banks that see themselves as “long-term survivors” will raise capital to position themselves to be an acquirer of other banks, Mr. Quayle noted. And anticipating that larger banks will enter the market soon, more community banks are deciding to go after capital now to avoid competing for investments, he said.

An imposition

Liberty Bank, which began a private placement around June 1, is raising capital to accommodate commercial loan growth and to meet “new capital standards imposed upon us” by the Office of the Comptroller of the Currency, said Bill Valerian, the bank's chairman, president and CEO.
The regulator required Liberty Bank to raise capital by June 30. To achieve one of the required ratios — total capital versus total net risk-weighted assets — Liberty Bank needed $750,000, Mr. Valerian said.
“That (amount) would only get to the newly imposed ratio,” he said. “It wouldn't give us any capital for future growth.”
So, the bank — which Mr. Valerian said is profitable — set a goal to raise $3 million to $5 million, of which it has raised more than $4.5 million.
It's the third time since 2004 that Liberty Bank has raised capital. It raised $5.5 million in 2004 and then $5.5 million in 2006, said Mr. Valerian, who knew this time “wasn't going to be a walk in the park.”
“People have this fear,” he said. “Everybody thinks bankers are stealing money from them, (that) they're incompetent, bad news.
“So, when you're out raising capital, you have to differentiate yourself,” he said. “And that's what we do.”
Liberty Bank doesn't buy millions of dollars of securities with its capital, Mr. Valerian said. It takes in customer deposits and lends money locally, and that's the message the bank works to disseminate, he said.
Eloise L. Mackus, CEO of Central Federal, confirmed that efforts related to raising capital are ongoing, but she wouldn't disclose additional information.
According to a press release the company issued in July, its board is “looking at a $15-$20 million capital raise ... and other alternatives to improve capital ratios of the company and CFBank.”
Should Central Federal fail to do what regulators deem necessary, dissolution or acquisition by another bank are identified as recourses in a May 2011 cease-and-desist order issued by the Office of Thrift Supervision. The order states that a Jan. 3 examination found the bank to be operating with an excessive level of adversely classified assets and inadequate earnings to augment capital.

Reality check

Larger, publicly traded banks can raise money in the national market, usually quickly and in large sums, Mr. Quayle said. Community banks tend to raise capital from local markets, which means it's in smaller amounts and takes longer.
Community banks tend not to have as many, if any, institutional investors, and in some cases have a tougher story to sell to investors because “the problems were more pronounced,” Mr. Crowley said.
Middlefield Banc began raising capital in 2010 and in February of this year filed paperwork anew with the Securities and Exchange Commission, changing some of the terms of its ongoing private placement. For one, it lowered the amount it is seeking to raise to $25 million from $30 million as a result of the market outlook, said Jim Heslop, executive vice president and chief operating officer.
“We're the last on the food chain,” he said, noting that super-regional banks have “a far easier time raising capital.”
“As we went out, we've had some interest and we've had some investors,” Mr. Heslop said. “But as we assessed the market and where we were and wanted to go, we felt ($25 million) was still realistic and more attainable.”
Mr. Heslop anticipates Middlefield Banc's process will wrap up in the next couple months, and he expects the company to raise a significant portion of its goal. One of the company's motivations for raising capital is a potential regulatory change to capital standards, he said.
The company also plans to deploy the capital to maximize shareholder return, and buying other bank offices and other banks are “always options,” Mr. Heslop noted.
“We've not been hesitant to do either one,” Mr. Heslop said, citing Middlefield's 2007 acquisition of Emerald Bank in Dublin, Ohio.

More eager to lend?

Mr. Crowley said he hopes banks over the next five years again will be able to generate most of their capital internally through earnings, instead of externally by raising capital.
Some banks in this region and elsewhere that have raised capital recently may have failed otherwise, leading to a loss of jobs and restricted choice for consumers and business borrowers, Mr. Crowley noted. And more capital should translate into more lending.
“Every bank would love to make good quality loans, but to the extent that their capital position is weak, we have had banks here and nationally that have been looking to limit their growth just for the sake of keeping their capital ratios up,” Mr. Crowley said.
That's the case with Liberty Bank, which plans in the short term to add $45 million in new loans in one year thanks to the added capital, Mr. Valerian said. In the longer term, over the next three to five years, the goal is to grow the bank to $1 billion to $1.5 billion in total assets from its current $217 million. Some of that growth likely would be via merger or acquisition, Mr. Valerian said.